Is an Algorithm Setting Your Rent?

The FWD #174 • 409 Words

Dynamic pricing for rental housing could lead to even more rent fluctuations.

Have you wondered why airline, hotel, or car rental prices change so quickly? Often within minutes of searching for a flight, the price may go up $100 or more for the same flight. A hotel price for a Tuesday night may be dramatically different for Thursday. 

This is “dynamic pricing” – a system that has been in effect for a decade or more, but is becoming increasingly sophisticated. This pricing model uses artificial intelligence to track buyer activity and behavior, demand shifts, historical trends, day of the week or hour of the day, and a host of other factors. The goal is to optimize sales and profits to the airline, hotel, and rental car industries.

Dynamic pricing in real estate rentals took hold within the Airbnb industry in the last few years–but is now moving into apartments. According to one software provider, nearly 30 percent of apartments managed by large companies are using this type of pricing.

To be sure, this model is currently in use primarily within the luxury rental market that has been booming in strong markets across the country–including several in Virginia. And, of course, the market does determine monthly rents for most rental housing – but the availability of software that “dynamically” sets rents is growing. This trend of day-to-day price volatility has some disturbing implications for renters.

Housing is a basic commodity that every household needs. On the other hand, plane tickets, hotels, and rental cars usually represent discretionary spending. Rental housing demand tends toward what economists refer to as inelastic.

You might remember how inelasticity plays into housing from this edition of The FWD we posted in July.

For low-income consumers, inelasticity increases. Housing consumers need a place to live regardless of whether the price goes up. We are currently experiencing the most rapid rent increases in 40 years. Rapid rent fluctuations make this worse.

Some predictability of rents – at least in the short term – is essential for renters to fairly participate in the market. If the price of an apartment is $150 higher on Friday than it was when the renter looked at it earlier in the week, that puts the renter in an untenable position.

The use of “dynamic pricing” for rental housing is a trend worth keeping an eye on. If it becomes more commonplace and begins to affect mid-  and lower-cost apartments, some “rules of the road” may be needed.

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